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entitled 'Review of OMB Circular A-76 Health Benefit Cost Factor
Needed' which was released on November 18, 2005.
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November 17, 2005:
Congressional Committees:
Subject: Review of OMB Circular A-76 Health Benefit Cost Factor Needed:
Determining whether to obtain required services using government
employees or through contracts with the private sector is an important
economic and strategic decision for agency managers. In this regard,
Office of Management and Budget (OMB) Circular A-76 prescribes policies
and procedures for use by agencies as they select service providers
through competitions among public and private-sector sources.[Footnote
1] The Circular is intended to ensure that the competitive sourcing
process is conducted as fairly as possible, and that the estimated cost
of government performance reflects all of the costs of performing the
work in house.
The purpose of this letter is to convey an issue we identified during
the course of an ongoing review of how the costs of health benefits for
federal and private-sector employees are reflected in public-private
competitions conducted by the Department of Defense.[Footnote 2] We
have determined that the health benefit cost factor prescribed in
Circular A-76 may not reflect the current cost to the government of
providing health insurance under the Federal Employees Health Benefits
Program (FEHBP). The cost to the government of providing health
benefits under the FEHBP has risen by more than 65 percent between 1999
and 2005. Yet the health benefit cost factor prescribed in A-76 has not
been changed at all in that time. In view of the increased cost of
providing health insurance since the cost factor last was revised, we
recommend that OMB review the health benefit cost factor to determine
if an adjustment is needed and establish a process to update it
periodically, as OMB does for other cost factors.
Standard Costing Factors for Estimating Personnel Costs Include
Employee Benefits:
Circular A-76 establishes standard costing factors that agencies must
use to estimate the costs of in-house performance. When preparing these
estimates, agencies use cost factors that are in effect as of the
solicitation closing date, revised to reflect projected changes to
these factors during the performance period. To estimate personnel
costs, for example, agencies add to basic pay a standard overall factor
of 32.85 percent to account for fringe benefits. This overall factor is
comprised of several components, including a standard cost factor of
5.7 percent to account for insurance and health benefits, as shown in
table 1.
Table 1: Components of Circular A-76 Civilian Position Full Fringe
Benefits Cost Factor:
Standard cost factor;
Insurance and health benefits[B];
Percentage of basic pay[A]: 5.7%.
Standard civilian retirement benefit [C];
Percentage of basic pay[A]: 24.0%.
Medicare benefit;
Percentage of basic pay[A]: 1.45%.
Miscellaneous fringe benefits;
Percentage of basic pay[A]: 1.7%.
Total;
Percentage of basic pay[A]: 32.85%.
Source: Circular A-76, attachments C and D.
[A] Circular A-76 defines basic pay as a civilian employee's annual
salary plus other applicable employee pay entitlements, such as premium
pay for civilian law enforcement officers.
[B] In addition to FEHBP, employees may receive life insurance benefits
through the Federal Employees Group Life Insurance program.
[C] The standard civilian retirement benefit cost factor includes the
government share for pension benefits (Social Security, Thrift Savings
Plan, Federal Employees or Civil Service Retirement Systems) and the
accruing costs for post-retirement health benefits.
[End of table]
According to OMB staff, the 5.7 percent cost factor reflects 0.2
percent for life insurance and 5.5 percent for health benefits. The
current insurance and health benefit cost factor is based on actuarial
estimates made in 1999.
Health Benefit Factor Not Revised during Period of Substantial FEHBP
Cost Growth:
Certain factors used in Circular A-76 calculations for computing the
government's non-pay and personnel costs are routinely reviewed and
adjusted by OMB. These include the standard inflation factor for
supplies and equipment and annual federal pay raise assumptions. This
periodic review helps to ensure that the cost factors are up to date in
order to reflect accurately the full estimated cost of performance.
Nonetheless, our discussions with competitive sourcing officials and
review of OMB's transmittal memoranda indicate that the insurance and
health benefits cost factor has not been reviewed and adjusted with the
same frequency as other factors, but rather has been set at 5.7 percent
of a position's basic pay since 1999.[Footnote 3]
In contrast, our review of the federal budget costs for FEHBP and the
annual average premium increases announced for FEHBP health insurance
plans indicates that civilian employee health benefit costs have
increased substantially since OMB last revised this cost factor. Our
analysis of federal budget data shows that the government's FEHBP costs
in fiscal year 2005 have increased by more than 65 percent relative to
fiscal year 1999.[Footnote 4] (See table 2.)
Table 2: Federal Government Gross Outlays for FEHBP,A Fiscal Years 1999
to 2005:
[See PDF for image]
Source: Budget of the U.S. Government.
[A] The FEHBP fund provides for the cost of health benefits for (1)
active employees; (2) employees who retired after June 1960 or their
survivors; (3) those annuitants transferred from the Retired Employees
Health Benefits fund program; and (4) the related expenses of the
Office of Personnel Management in administering the program.
[B] 2005 outlays are estimated.
[End of table]
Additionally, the annual open-season enrollment announcements from the
Office of Personnel Management (OPM) indicate that average FEHBP
premium increases have ranged between 7.9 and 13.3 percent per year
during the period from 1999 to 2005.[Footnote 5] (See table 3.) The
government-paid portion of FEHBP premiums averages 71 percent.[Footnote
6]
Table 2: Average FEHBP Premium Increases, 1999 to 2005:
[See PDF for image]
Source: OPM announcements of FEHBP open season premium changes.
[End of table]
Despite these changes in federal employee health benefit costs under
FEHBP, the Circular A-76 health benefits cost factor, which is designed
to reflect the health care cost to the government for in-house
performance, has not been adjusted by OMB at all during that time.
Conclusion:
Health care costs are a large and growing consideration both for the
private sector and for government operations. Yet despite recent
increases in the government's cost of health care premiums, the cost
factor in Circular A-76 designed to reflect these costs has not been
adjusted in the past 6 years. We recognize that an adjustment of this
factor could result in higher estimates of the total cost of government
performance, and in some cases this could affect the outcome of public-
private competitions. Nevertheless, the sourcing principles adopted by
the Commercial Activities Panel,[Footnote 7] call for competitions
between government and private-sector sources to be conducted as fairly
as possible. In our view, fairness requires that any cost factor used
in estimating the cost of performance, whether by private or public
sector sources, be as accurate and current as possible in order to
protect the integrity of the process.
Recommendations for Executive Action:
In order to ensure the health benefit cost factor appropriately
reflects up-to-date and accurate assumptions, we recommend that the
Director of OMB take the following two actions:
* Reevaluate the health benefit cost factor to determine if an
adjustment is necessary, based on the most current federal health
insurance costs under FEHBP.
* Establish procedures to provide for periodic updates of the health
benefit cost factor in view of changes over time to the government's
costs associated with FEHBP benefits.
Agency Comments:
We provided a draft of this letter to OMB for review and comment. OMB
did not provide official agency comments, but OMB staff provided
technical suggestions, which we incorporated as appropriate. The staff
also stated that OMB is working with OPM in reviewing the health
benefit and insurance cost factors and is looking at options for
reviewing these factors on a more regularized cycle.
Scope and Methodology:
The information in this letter is based on ongoing GAO work and limited
additional work conducted from February through October 2005, in
accordance with generally accepted government auditing standards. In
conducting our work, we reviewed federal budget data and OPM
announcements regarding FEHBP costs between 1999 and 2005, and A-76
policies and procedures for preparing personnel cost estimates for in-
house performance, including the personnel health benefit factor used
in making estimates for government cost. We also held discussions with
competitive sourcing officials at the Department of Defense and OMB.
We are sending a copy of this letter to the Director for the Office of
Management and Budget and other interested congressional committees. We
will provide copies to others upon request. This letter will also be
available on GAO's home page at http://www.gao.gov. If you have any
further questions or would like to discuss this matter in more detail,
please call me or Katherine Schinasi, Managing Director, Acquisition
and Sourcing Management (ASM), who may be reached at (202) 512-4841.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. This letter was
prepared under the direction of Bill Woods, Director, ASM. GAO staff
who made contributions to this letter were Carolyn Kirby, Assistant
Director; John Dicken; Rosa Johnson; Charles Perdue; Russ Reiter;
Sylvia Schatz; Natalie Schneider; Robert Swierczek; and Tony Wysocki.
Signed by:
David M. Walker:
Comptroller General of the United States:
(120491):
List of Congressional Committees:
The Honorable Susan M. Collins, Chairman:
The Honorable Joseph I. Lieberman:
Ranking Minority Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Thomas M. Davis, Chairman:
The Honorable Henry A. Waxman:
Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
The Honorable John Warner, Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Duncan L. Hunter, Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable Ted Stevens, Chairman:
The Honorable Daniel K. Inouye:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable C.W. Bill Young, Chairman:
The Honorable John P. Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives.
FOOTNOTES
[1] OMB Circular A-76, Performance of Commercial Activities, revised in
May 2003, establishes federal policy and procedures for determining
whether commercial activities should be performed in-house, by another
federal agency, or by the private sector. Circular A-76 contains
procedures agencies must use in calculating and comparing the costs of
performance by in-house, private, or public reimbursable sources.
[2] In response to direction in the conference report on the Ronald W.
Reagan National Defense Authorization Act, House Rep. No. 108-767, we
are reviewing the implementation of section 8014 of the Department of
Defense Appropriations Act, 2005, Public Law No. 108-287. Section 8014
contains requirements concerning the costs of health benefits in public-
private competitions conducted by the Department of Defense.
[3] Circular No. A-76 (Revised), Transmittal Memorandum No. 19,
Performance of Commercial Activities, March 24, 1999. In this
memorandum, OMB revised the then 5.6 percent cost factor for insurance
and health benefits up by 0.1 percentage points (on the health
insurance side) to 5.7 percent.
[4] This increase reflects both the increase in premiums paid by active
federal employees and retirees and the increase in the amount paid by
the government for all participants. However, the insurance and health
benefit cost factor used in Circular A-76 is based only on the costs
borne by the government (not enrollee premiums) and only on behalf of
active federal employees (not retirees). Increases in government costs
for retirees are reflected in the standard civilian retirement benefit
cost factor.
[5] OPM develops two figures for annual FEHBP premium changes: one in
the fall prior to open season enrollment, when negotiations with the
plans are complete, and the second after enrollment has occurred. The
difference is that there may be some change in enrollment following the
open season, with some people leaving plans with higher premium cost
increases and joining plans with lower cost increases. In October 2005,
OMB provided us OPM's post-open season enrollment FEHBP premium changes
between 1999 and 2005 which showed that premium increases ranged
between 7.4 and 12.7 percent.
[6] The implications of higher government-paid costs from increased
FEHBP premiums since 1999 will have to be determined through actuarial
analyses based on other related changes over time, such as changes in
the average salaries of active federal employees and their
participation rates in the FEHBP.
[7] Commercial Activities Panel, Improving the Sourcing Decisions of
the Government (Washington, D.C.: Apr. 30, 2002).